Apple playing a familiar tune with AirPods

Apple’s biggest product this Christmas is likely to be its smallest. It may also complicate the company’s efforts to change its story.

Apple’s AirPods Pro wireless earbuds feature active noise cancellation

Apple’s biggest product this Christmas is also likely to be its smallest. It may also complicate the company’s efforts to change its story.

Apple launched its newest wireless earbuds in late October. The AirPods Pro offer noise cancellation and a more customised fit at a reduced size. At $US249 ($364), the buds cost 57 per cent more than the standard version, which Apple still sells. They are also among the priciest wireless buds on the market.

That hasn’t stopped the AirPods Pro from flying off shelves. Apple has reportedly had to boost production of the devices to meet booming demand. Japanese newspaper Nikkei reported last week that Apple asked its Chinese contract manufacturer, Luxshare, to double output.

According to Apple’s website on Friday, AirPods Pro units ­ordered now won’t be delivered until early January. The device also was shown as out of stock at Amazon and Best Buy as of Friday afternoon.

It is shaping up to be a strong season for Apple’s wearables business, which also includes the Apple Watch. Analysts currently expect revenue for the company’s Wearables, Home and Accessories segment to surge 34 per cent year over year to $US9.8bn for the fiscal first quarter ending December. That’s an acceleration from the 33 per cent growth seen in the same period last year, which was also helped by the original AirPods. Jim Suva of Citigroup boosted his price target on Apple by 20 per cent to $US300 last week, projecting wearable revenue surpassing $US10bn this quarter.

Wearables are Apple’s fastest-growing business — and rapidly approaching the size of its vaunted services arm. Total wearable revenue surged 41 per cent to $US24.5bn for Apple’s full fiscal year that ended in September. Service revenue hit $US46.3bn for the fiscal year, but its 16 per cent increase was a ­notable deceleration from 22 per cent growth in the preceding year. Apple doesn’t disclose specific sales figures for wearable devices, but the company’s 10-K filing did cite AirPods as the primary factor driving wearable growth in the recent fiscal year.

The shift to services has been a key part of the narrative driving Apple’s stock price — and valuation — to new highs this year. The company has furthered this effort with recent new offerings such as Apple TV+ and Apple ­Arcade. But Apple’s services are a complicated mix of high-margin contributions such as ­AppleCare, iCloud and licence fees from Google that offset the lower margins of its media-­related fare. Due to heavy promotions and the cost of producing high-calibre programming, few analysts expect Apple TV+ to be a significant contributor to the business in the current fiscal year.

By contrast, AirPods show Apple playing to its strengths. The company has long excelled at well-designed products it can sell at a premium. And because they are designed to work closely with the iPhone, wearable devices can serve to further lock in customers to what remains Apple’s largest business. This is a tune Apple knows well.